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On October 17, 2018, the World Trademark Review magazine published an article on how technology companies dominate the top 10 companies boasting the highest level of intangible value, but the picture is different when only disclosed intangible value is considered – prompting a call for a new approach to financial reporting.

Belgium boasted the highest percentage of disclosed intangibles versus total enterprise value (39.8%), in large part due to Anheuser-Busch InBev’s balance sheet – the company having the second-highest value of disclosed intangibles worldwide, totalling $187 billion.

On October 31, 2018, the International Accounting Standards Board (the Board) issued "Definition of Material (Amendments to IAS 1 and IAS 8)" to clarify the definition of "material" and to align the definition used in the Conceptual Framework and the standards themselves.

Changes and reasoning behind the changes

The changes in Definition of Material (Amendments to IAS 1 and IAS 8) all relate to a revised definition of "material" which is quoted below from the final amendments:

Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.

Three new aspects of the new definition should especially be noted:

Obscuring. The existing definition only focused on omitting or misstating information, however, the Board concluded that obscuring material information with information that can be omitted can have a similar effect. Although the term obscuring is new in the definition, it was already part of IAS 1 (IAS 1.30A).

Could reasonably be expected to influence. The existing definition referred to "could influence" which the Board felt might be understood as requiring too much information as almost anything "could" influence the decisions of some users even if the possibility is remote.

Primary users. The existing definition referred only to "users" which again the Board feared might be understood too broadly as requiring to consider all possible users of financial statements when deciding what information to disclose.

During redeliberations, the Board spent a lot of time on discussing what constitutes obscuring information. The amendments stress especially five ways material information can be obscured:

if the language regarding a material item, transaction or other event is vague or unclear;

if information regarding a material item, transaction or other event is scattered in different places in the financial statements;

if dissimilar items, transactions or other events are inappropriately aggregated;

if similar items, transactions or other events are inappropriately disaggregated; and

if material information is hidden by immaterial information to the extent that it becomes unclear what information is material.

The new definition of material and the accompanying explanatory paragraphs are contained in IAS 1, Presentation of Financial Statements. The definition of material in IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors has been replaced with a reference to IAS 1.

Effective date

The amendments are effective for annual reporting periods beginning on or after January 1, 2020. Earlier application is permitted.

Additional information

On October 22, 2018, the International Accounting Standards Board (IASB) issued "Definition of a Business (Amendments to IFRS 3)" aimed at resolving the difficulties that arise when an entity determines whether it has acquired a business or a group of assets. The amendments are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2020.

Background

The post-implementation review of IFRS 3, Business Combinations revealed that entities have difficulties when determining whether they have acquired a business or a group of assets. As the accounting requirements for goodwill, acquisition costs and deferred tax differ on the acquisition of a business and on the acquisition of a group of assets, the IASB decided to issue narrow scope amendments aimed at resolving the difficulties that arise when an entity is determining whether it has acquired a business or a group of assets.

Changes

The amendments in Definition of a Business (Amendments to IFRS 3) are changes to the implementation guidance of IFRS 3 only. They:

clarify that to be considered a business, an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs;

narrow the definitions of a business and of outputs by focusing on goods and services provided to customers and by removing the reference to an ability to reduce costs;

add guidance and illustrative examples to help entities assess whether a substantive process has been acquired;

remove the assessment of whether market participants are capable of replacing any missing inputs or processes and continuing to produce outputs; and

add an optional concentration test that permits a simplified assessment of whether an acquired set of activities and assets is not a business.

Interaction with the FASB

The amendments note that IFRS 3 is the result of a joint project between the IASB and the Financial Accounting Standards Board (FASB) and the business combinations requirements under IFRS® Standards and US GAAP are substantially converged. However, even though the FASB (that had received similar feedback) and the IASB have worked together to respond to problems with the definition of a business, the IASB amendments to the application guidance of IFRS 3 are different from the amendments issued by the FASB in 2017. Nevertheless, the IASB expects that the amendments in conjunction with the FASB amendments will lead to more consistency in applying the definition of a business between entities applying IFRS Standards and entities applying US GAAP.

Effective date and transition requirements

The amendments are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2020 and to asset acquisitions that occur on or after the beginning of that period. Earlier application is permitted.

On October 30, 2018, the International Accounting Standards Board (IASB) released a speech by IASB® Member Ann Tarca, where she discussed the relationships of the IASB with its primary stakeholders. The speech was given at the RJ Chambers Memorial Research Lecture in Sydney.

Ms. Tarca's speech was a tour d'horizon covering:

development of a set of global standards for use in the world’s capital markets (2001–2005);

the convergence program with the Financial Accounting Standards Board (FASB) and impact of the global financial crisis (2006–2009);

working on the major standards (2010–2013); and

implementation of the major standards and the better communication initiative (2014 onwards).

On October 18, 2018, our US firm released a publication describing three important areas of innovation – emerging technologies, cooperative relationships, and organization and governance models – that leading companies are pursuing to reset the front line of defense.

A large global organization may have tens of thousands of suppliers, accounting for up to 80% of organizational cost. It may also have a number of partnerships, alliances, and other business relationships with external parties, all of which have suppliers, partnerships, and alliances of their own. Indeed, in today’s digitally interconnected world, business ecosystems are growing bigger and more complex than ever before – and while this drives a great deal of value, it also inevitably gives rise to extended enterprise risks stemming from external parties’ actions.

Virtually every aspect of an organization is vulnerable to extended enterprise risk, and as organizations continue to evolve toward more complex ecosystems, these risks will likely only grow. Yet, while this is widely acknowledged, extended enterprise risk management (EERM) practices have remained relatively immature. At too many organizations, EERM processes fail to adequately consider extended enterprise risks – which not only exposes an organization to harm, but, worse, may even blind them to the possibility that harm could arise.

Why this failure? Partly, it’s because of the sheer difficulty of monitoring and managing the myriad of value-creating activities that take place outside one’s own legal control. However, the whole explanation isn’t simply that EERM is difficult. It’s also because many management teams and boards have yet to reset their concept of the “front line of defense” to include suppliers, customers, and others in the organization’s broader system of stakeholders.

The good news is that the pragmatic difficulties of managing extended enterprise risk are lessening, thanks to new technological and organizational approaches that can reduce the necessary investments and establish clear accountability for executing EERM activities.

On October 25, 2018, the International Accounting Standards Board (the Board) posted the papers to be presented and discussed at its fifth Research Forum on November 11 and 12, 2018 in Sydney, Australia.

The two days will see the presentation of six academic papers, followed either by a response of an academic and an IASB/AASB representative or by a panel discussion. In both cases, the audience will be invited to participate in the discussion. The papers include the following:

On October 29, 2018, the International Accounting Standards Board (the Board) released a summary of the accounting research projects developed by five teams of researchers, which was presented to IASB® members and technical staff. The research projects are independent, but are all directly relevant to projects on the Board’s work plan. The involvement with the research programme helps the Board to ensure its standard-setting is evidence-based.

The evidence the Board is looking for includes:

responses to consultative documents;

fieldwork such as assessing systems changes or the hypothetical application of a proposed new financial reporting requirement;

On October 24, 2018, the Financial Reporting Council (FRC), in an open letter to Finance Directors and Audit Committee Chairs, called for improvements in key areas of corporate reporting, including key accounting judgements and estimates, eliminating basic errors and how companies have applied the Principles of the UK Corporate Governance Code.

On October 24, 2018, the International Accounting Standards Board (the Board) released a summary of its meeting, where they discussed IFRS 17, "Insurance Contracts" to determine whether the various concerns regarding the standard that have been brought to their attention required any action.

Since IFRS 17 was issued in May 2017, the Board has been monitoring the implementation and has learned about concerns and implementation challenges. There were four papers discussed at the meeting.

The discussion focused on agenda paper 2C, which revealed the criteria the IASB® staff developed for the Board to use in assessing whether the concerns warrant considering an amendment:

the amendment would not result in significant loss of useful information relative to that which would be provided by IFRS 17 for users of financial statements and

the amendment would not unduly disrupt the implementation processes that are already under way or risk undue delays in the effective date of a standard that is needed to address many inadequacies in the existing wide range of insurance accounting practices.

In the paper, the staff also noted that even if the Board agrees that any potential amendment to IFRS 17 meets the criteria, it does not mean that all amendments meeting these criteria are justified. The staff also stressed that any changes would affect the effective date.

Here are some of the comments made by the Board:

amendments need to be necessary, not just to fulfill the criteria;

what's missing in the criteria is that changes should not compromise the criteria of IFRS 17;

the Board should deal with implementation issues only, not just anything that is connected with IFRS 17;

changes should be narrow in scope and should be able to be dealt with efficiently;

changes to IFRS 17, a final standard, would impact those who have already begun implementing it;

the Board needs to consider the interaction with IFRS 9;

do the issues identified relate to material new information or are they issues the Board has considered before?

investors are waiting for the new standard, there needs to be a high hurdle for changing it;

benefits of changes need to exceed the costs;

a lot of work went into the standard;

a lot of people are waiting for the standard to become effective.

Chairman Hans Hoogervorst concluded the discussion by stating that he had read the papers for the discussion with a heavy heart. He just hoped that the standard would get into place before the next financial crisis - as the markets are very nervous and there is too much debt in the market. He therefore concluded that changes to IFRS 17 should be fine-tuning only and legitimized by decreasing costs. He also added that the whole package of issues should be looked at and that 25 issues were too many.